Alcatel (NYSE: ALA; Paris: CGEP:PA) and Microsoft Corp. (Nasdaq: MSFT) today confirmed they are developing a joint IPTV management and service delivery solution for telecom service providers.

The news announcement comes two months after Light Reading first revealed that the partnership was in the works (see Alcatel, Microsoft Tuning IPTV Deal).

The two firms have been competitors in the IPTV middleware market until now. Microsoft launched its offering late in 2003, and Alcatel acquired two specialist vendors in 2003 to create its own software solution, the Open Media Suite, that it could sell to carriers alongside its DSLAMs (see Microsoft Sells IP TV to Carriers, Alcatel Denies iMagic Fadeout, Alcatel Unveils Open Media Suite, and Who Makes What: Telco Video).

But Microsoft has been snapping up the major carrier deals, most notably at SBC Communications Inc. (NYSE: SBC), where Alcatel is the lead integrator and is having to implement Microsoft's IPTV system (see SBC Awards Microsoft $400M IPTV Deal ).

Microsoft's other high-profile IPTV announcements include a deal at Verizon Communications Inc. (NYSE: VZ) and trials at BellSouth Corp. (NYSE: BLS), Swisscom AG (NYSE: SCM), and Telecom Italia SpA (NYSE: TI), among others (see Verizon Makes Microsoft Video King, BellSouth Trials Microsoft's IPTV, Swisscom to Trial IP TV Service, and Microsoft IPTV: Now That's Italian!).

But not everything has gone smoothly for Microsoft, and industry gossip has it that Alcatel had to dig the software firm out of an integration hole at Swisscom (see Swiss IPTV Trial Hits 'Glitches').

Not that the two vendors want to talk about such issues. On a conference call today, Moshe Lichtman, VP of Microsoft’s TV division, sidestepped a question on reported delays at Swisscom and SBC, saying only that Microsoft is very pleased that Swisscom has completed its trial and is putting together a deployment plan.

So what's the fallout from this partnership? First off, the two firms seem pleased to have the whole issue out in the open. "We're ready to go," Alan Mottram, president of Alcatel’s fixed solutions division, told the conference call. "This is our coming out party."

What then came out is how these two powerhouses are preparing to dominate the market. Alcatel is to be Microsoft's equipment partner of choice and integrate its software into the vendor's hardware. Doing that, said Lichtman, should mean "less cost and fewer headaches [for carriers] than multivendor solutions typically involve."

This will involve Alcatel adapting its DSLAMs and routers to make them more interoperable with Microsoft's software, and vice versa, the firms said, which will help to optimize important capabilities such as fast channel zapping.

But what does this mean for Alcatel's current Open Media Suite customers, of which the vendor says there are 24 (see, for example, Russians Pick Alcatel for Entertainment and Alcatel, Acer to Deploy IP TV in Taiwan).

Mottram says Alcatel isn't stopping R&D on its system, and it'll continue to support its existing commercial and trial customers. The new combined package will be offered to the existing user base, but it's not likely that all will want the joint solution, said the Alcatel man.

The chief aim of the partnership, though, is to pin down the world's biggest carriers. Microsoft reckons the top 20 operators account for between 60 percent and 70 percent of the world's access lines, and "with Alcatel we will be able to target those much more effectively," said Lichtman.

The team hopes to persuade those carriers that an Alcatel/Microsoft combo can help them deliver IPTV services more cost effectively than if they used alternative systems. A focus will be working on technical solutions that will reduce the cost of the set-top boxes that sit in residential homes, and Microsoft is already working with some hardware partners with that goal in mind.

The new partners will also work together to develop Amigo TV, a community TV application developed by Alcatel.

The two companies are coy, though, about how they will share the spoils of any joint contracts, saying only that each will be compensated for its particular contributions. It's also unclear exactly what resources each firm will put into the partnership.

And they've clearly been keeping the joint partnership a secret from their prospective customers. Telecom Italia executive Massimo Coronaro, who was presenting today at the 21st Century Communications World Forum event in London, is trialing both vendors' middleware platforms and was surprised by the news.

The new combination of the world's leading DSL equipment provider and the world's dominant software firm should be a frightening prospect for the two firms' competitors in the increasingly competitive TV and video-over-broadband market.

Not that those competitors will admit it, though, as there is still scepticism about whether Microsoft's software can stand the rigors of a large-scale carrier deployment, especially when a time-sensitive service such as live TV is involved.

"Microsoft has a good front end -- it looks good," says Jeff Paine, VP of strategic marketing at UTStarcom Inc. (Nasdaq: UTSI), which is trying to attract attention to its own end-to-end IPTV system (see UTStarcom, Myrio Have Their IPTV and UTStarcom Launches IP TV System).

"The issue will be whether Microsoft's fundamental architecture will scale. That'll only become apparent when it's deployed" by a carrier that has many hundreds of thousands or millions of customers, says Paine.

— Nicole Willing, Reporter, and Ray Le Maistre, International News Editor, Light Reading